India's Manufacturers In Shackles

Without labor-law reform, Indian industries are likely to lose out to China

The bustling new office and technology parks in Bangalore, Hyderabad, Madras, and Bombay are in the midst of a hiring boom. India's technology-services industry alone has taken on 300,000 people since 2000, with an additional 400,000 expected in the next three years. And as India's economy has grown in the past 10 years, small businesses ranging from carpentry shops to corner groceries have hired some 25 million new workers.

But there is one important sector that has been left out of India's hiring binge: the country's old-line manufacturing industries. Despite years of healthy economic growth and booming demand for motorcycles, television sets, and air conditioners, Indian manufacturers with 100 employees or more have added only around 25,000 full-time jobs since 1993 -- a drop in the bucket in a nation where more than 10 million people enter the workforce every year.

Here's the big irony: The root cause of this dreary record is a statute left over from India's socialist past that was actually intended to protect manufacturing jobs. Under the Industrial Disputes Act of 1947, any company with 100 or more workers cannot lay off employees without permission of the local state government. And such approval is rarely granted, says a recent World Bank study. As a result, the typical Indian company has 17% more workers than it needs. Little wonder that multinationals are bypassing India as they stampede to China -- even though wages and the availability of skilled workers are roughly the same in both countries. India's real job growth has been in services, where employers may downsize without state permission. Also exempt are small manufacturers. If India is truly interested in competing for global manufacturing with its neighbor to the east, analysts say, it needs to amend its laws.

For now, big manufacturers rely on automation and contract workers to boost output, rather than new staff. In fact, producers are increasingly shedding staff through expensive voluntary retirement schemes. Tata Steel, for instance, has lost 38,000 full-time workers -- half of its total -- in the past five years. At the same time, it has boosted production by 50%. In this year's second quarter, revenues surged by 24%, to $548 million, and quarterly profits quadrupled, to a record $58 million. But the freeze on permanent hires can be brutal on temporary workers, who have no benefits or job security. In early October, two workers at sister company Tata Power Co. who had finished their contract work set themselves on fire at Tata's Bombay headquarters when they were denied permanent jobs. One died.


Inflexible labor policies are one of the biggest obstacles to a genuine economic takeoff in India. True, India has enacted vital reforms since the early '90s -- from slashing tariffs and privatizing industries to dismantling stifling controls on investment. India's information-technology services and call-center industry are exploding. And the Bombay Stock Exchange is on a roll: It's up 27% since January, and foreigners have poured $3 billion this year into stocks of newly restructured companies. "Hurricane India set to take the world by storm," crowed The Economic Times last week.

But the would-be hurricane seems certain to remain a light shower if the government keeps shackling big manufacturers, which hesitate to expand lest they be stuck with excess workers during the next downturn. "Tech services-driven growth is great, but it's no substitute for the large-scale employment that increased manufacturing brings," says Subir Gokarn, chief economist for India's top rating agency, Crisil. "The law must be amended." With more than $40 billion in foreign direct investment pouring into China year after year, vs. less than $4 billion in India, New Delhi can't afford to wait to revamp its manufacturing sector. Otherwise, foreign investment will continue to seek other, greener pastures.

By Manjeet Kripalani in Bombay

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